Bitcoin is revelling in its strongest run since 2013, with nine near consecutive higher highs posted every week from September 2016. While a whole basket of reasons have been thrown out there as to why bitcoin is rallying, what is perhaps more important is when bitcoin’s price will peak.
Although many speculators are focusing on Yuan devaluation to drive the price higher, the Chinese economy is actually stabilizing and recent figures are showing an uptick in inflation and economic activity. USD-CNY has also shared a strong run with bitcoin, but correlation does not necessarily mean causation, and a correction looks likely.
Also, downward manipulation of the Yuan will be minimal so that China does not look culpable in a geopolitical context. Demonetization is also a strong force driving bitcoin recently as well. But whatever happens with the Yuan, what is certain is that bitcoin is driving higher.
Market participants may look to sell after such a bullish run, but there are some indications that the bullish run will continue to propel BTC-USD to fresh highs. But when will the price peak?
The best-educated guess; during the week beginning January 23, 2017.
To understand why, we must look into candlestick analysis. Originating in Japan, this technique has been used for centuries to trade all sorts of commodities. Steve Nison details these tried and tested techniques, revealing the roots of Japanese candlesticks and how to trade these patterns.
The basic theory that is relevant to bitcoin after such a bullish run is that of ‘record sessions’; during a rally a trader should stop buying after eight to ten record session highs (or liquidate longs/sell short after a bearish candle after the eighth to tenth record session high.)
However, another important point to note is that these record sessions do not need to be consecutive, but rather near consecutive. This is due to indicate overbought and oversold conditions. The record session count is invalidated if after a record session high there is no higher high after the three following sessions. Also, Nison explains that the eight to ten is a rule of thumb. As each market displays its own, unique characteristics, it could be that some markets correct a rally after just six or after 12 record session highs.
The highest ever number of ‘record session’ highs (on the weekly timeframe) BTC-USD has made is 13, highlighting the unique characteristic of the market, which was back in 2013. This rally saw BTC-USD scale from a low of $12.77 in December 2012 to $259.34 in April 2013.
Now, we can apply these principles to the market’s ongoing rally. The chart below shows the weekly price action, highlighting the nine record sessions highs established so far. While the rule of thumb is that ten record session highs increase the chance of a reversal, we have seen that Bitcoin, and other commodities, have broken this rule, so it is reasonable to assume there could be another two record session highs in the current bull run before the market reaches a peak.
During the Christmas holiday period, trading volumes will be thin and not much price action is to be expected. Then as we enter 2017, we could see fresh highs above $800, marking a tenth record session high. Then finally, the latest we will see an eleventh record session high will be the last week of January. Of course, there is the possibility we could see 13 record session highs, in which case we could anticipate the rally to peak early February 2017.
So, we know when the market is likely to reach the end of the bullish run. But at what price will buyers become exhausted and see the market move lower? The chart below provides an answer.
This week we have seen the market nudge above the critical fractal resistance at $778.85. By using the Fibonacci ratio, we see that the Fibonacci support/resistance levels correspond nicely with the historical price action.
After peaking at $778.85 and forming fractal resistance, the market held firm at the Fibonacci level at $566.35 in August 2016, trending higher since and confirming a continuation of the previous uptrend.
Now with BTC-USD moving above the Fibonacci level at $778.85, the market will look to move towards the 161.8 percent Fibonacci extension level at $991.35, as shown above. The long-term upward trend is far from over, with new targets at the first two Fibonacci extension levels, $991.35 and $1335.20.
Therefore, analyzing the market using Japanese candlesticks and Fibonacci numbers to represent crowd psychology, there are strong technical reasons why 2017 will finally see BTC-USD re-emerge above $1000. But specifically, there is a strong probability the current rally will peak just below $1000 during the week beginning January 23, 2017, and then enter into a reversal.